Industry Voice: Building a Better Portfolio - Balancing Performance and Liquidity

clock • 4 min read

The search for higher returns and better diversification has led many institutional investors to allocate more capital to illiquid private assets, which has come at the cost of decreasing portfolio liquidity. At the same time, private asset investors may encounter additional and hard to predict liquidity demands when, say, GPs make capital calls stemming from prior commitments.  

Leveraging the cross-asset research capability and experience of the GIC's Economics and Investment Strategy (EIS) and PGIM's Investment Advisory & Solutions (IAS) teams, we've enhanced PGIM's asset allocation framework (OASISTM - Optimal Asset Allocation with Illiquid Assets) to link bottom-up private asset investing with top-down asset allocation so that liquidity measurement and cash flow management can be integrated into a multi-asset, multi-period portfolio construction process. 

Investors can use this framework to analyze how allocations to illiquid private assets, in combination with their private asset commitment strategy, affect their portfolio's ability to respond to liquidity demand and address the following asset allocation questions:

  1. What should be the desired allocations to liquid and illiquid assets given the investor's liquidity risk tolerance?
  2. How would various market scenarios impact the portfolio's liquidity and performance?
  3. How to formulate a private asset commitment strategy to manage exposure and the uncertainty in timing and magnitude of cash flows over time?  

This research is a collaboration between GIC EIS and PGIM IAS.

For Professional Investors only. All investments involve risk, including the possible loss of capital.

The information contained herein is provided by PGIM, Inc., the principal asset management business of Prudential Financial, Inc. (PFI), and an investment adviser registered with the US Securities and Exchange Commission.  PFI of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom.

In the United Kingdom and various European Economic Area jurisdictions, information is issued by PGIM Limited with registered office: Grand Buildings, 1-3 Strand, Trafalgar Square, London, WC2N 5HR. PGIM Limited is authorised and regulated by the Financial Conduct Authority of the United Kingdom (registration number 193418) and duly passported in various jurisdictions in the EEA. Prudential Financial, Inc. of the United States is not affiliated with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. These materials are issued by PGIM Limited to persons who are professional clients or eligible counterparties as defined in Directive 2014/65/EU (MiFID II), investing for their own account, for fund of funds, or discretionary clients. In certain countries in Asia, information is presented by PGIM Singapore, a Singapore investment manager registered with and licensed by the Monetary Authority of Singapore. In Japan, information is presented by PGIM Japan Co., Ltd., a registered investment adviser with the Japanese Financial Services Agency. In South Korea, information is presented by PGIM, Inc., which is licensed to provide discretionary investment management services directly to South Korean investors. In Hong Kong, information is presented by representatives of PGIM (Hong Kong) Limited, a regulated entity with the Securities and Futures Commission in Hong Kong to professional investors as defined in Part 1 of Schedule 1 of the Securities and Futures Ordinance. It is anticipated that certain investment management services would be delegated to PGIM, Inc. the above listed entities' U.S. registered investment advisory affiliate.

While GIC and PGIM have collaborated for purposes of conducting research and developing this paper, GIC and PGIM are not joint venturers, affiliated in any way, or collectively providing or offering any services or products."

In providing these materials, GIC and its affiliates and PGIM are not acting as your fiduciary.

The analysis in the paper is based on hypothetical modeling. There is no guarantee, and no representation is being made, that an investor will or is likely to achieve profits, losses or results similar to those shown. These materials are for informational or educational purposes only. The information is not intended as investment advice and is not a recommendation about managing or investing assets. These materials represent the views, opinions and recommendations of the author(s) regarding the economic conditions, asset classes, securities, issuers or financial instruments referenced herein.

The PGIM logo and the Rock design are service marks of PFI and its related entities, registered in many jurisdictions worldwide.

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